Mini-Budget puts strain on the Rand - what next?

A rough week for the Rand, with all eyes on the Mid-Term Budget, which is often a trigger for some explosive moves...

And that was exactly what we got, as the Rand went spiraling after Tito Mboweni's very honest budget.

Perhaps too honest, for the likes of investors.

A lot of ideas, a lot of positive sounding plans, but the economic figures were crushing to investor confidence.

Let's review the week, with a focus on what came out in the mini-budget speech, and the Rand's reaction to that.

It was a busy week. Here are a few of the key moments and outcomes:

Mid-Term Budget - what else was possibly going to be in the #1 spot on our list? A difficult budget to swallow, with lots of key facts and figures becoming public.

US Tariffs on SA - Steel and Aluminum are some of the key exports from SA, and they have now been caught in the middle of the Trade War tariffs...

Asian & US market collapse - the Dow and major stock markets endured a midweek collapse...

Ratings agencies - they are in real focus after this last week, as one would surely expect that Moody's would release some kind of statement after Mboweni's statement...?

Ramaphosa's investment hunt - in the days following the budget speech, we got an update from how the investment drive was going from the President...

So...

...the first half of the week was great. The Rand roared stronger, giving it prime positioning in view of the Mid Term Budget Policy Statement (MTBPS):

And then it went a bit off course following Mboweni getting started.

In fact, the reaction was so fast, it was clear that it was not even relative to what Mboweni was saying. The Rand had lost more than 12c in value, barely before he had finished introducing himself, greeting all the ministers!

It was just the trigger for some underlying sentiment.

So, where did the Rand end its upward rush?

By Friday, it had touched R14.75, after breaking as low as R14.14 before the budget. A rather sorry state of affairs...

So, what did Mr. Mboweni say, and what do we make of it all?

The speech went something like this:

Debt - R181bn to be spent this year to service debt, rising to R247bn in 2021

Mboweni made it clear. This is crossroads for SA, economically. It is a very finickity and difficult situation for a new finance minister to handle, and he is trying his best to get his head around it.

But, with those types of economic figures, it is clear that there is still a long road ahead.

And that is the other half of the budget speech - what is planned to try turn it all around.

Which brings us to the economic stimulus plan:

This is where the positives lie, with government’s renewed drive to stimulate the economy:

But the big one is still Moody's - and they came out to say on Friday that the "budget speech was credit-negative"... At this stage, more a warning shot than anything else, and it would appear that there are 6 months for things to turn around before the next credit review!

There were a few more important headlines during the week:

Ramaphosa's update on the investment drive was quite something. He lauded the success of the drive so far, saying he has been "overwhelmed" by the interest in the investment conference which was held in JHB. "The investment strike by business is over!", were the words that he used following the conference, with R290bn committed to the South African economy over the next 5-10 years. In addition to that, he revealed that SA has pledges of R400bn more from countries he and his investment envoys have visited over the last 6 months! Among these were pledges to invest more than USD 8bn (approx R116bn) on Friday, including a USD 6bn (approx R87bn) commitment from Anglo American. This is crucial to keeping the ratings agencies from downgrading SA further.

US Tariffs on Aluminum and Steel have been damaging for SA, and this does not seem to be changing anytime soon. SA applied to the US for an exemption from the tariffs, and the result of that application came back this last week: negative. This makes it very difficult to stay competitive, and does not improve SA's trade balance either...

US stock markets and Asian markets struggled during the week, with the Dow Jones (DJI) dropping 1000 points. Along with that the Asian markets suffered across the board. It has been a controversial couple of weeks in the US, with the Saudi Arabian situation playing out, and then all this internal conflict with the pipe bombs being sent to key political figures.

ECB's interest rate decision came through on Thursday, and the rates were left unchanged, as expected. There were more economic events such as US Goods Trade Balance, which widened further... despite the efforts to reverse this trend by Trump. However, on Friday, the US GDP came through at a fantastic 3.5% growth, showing more strength to come in the US economy.

When the Rand hit 14.75 on Friday, it seemed like the week was going to be a one-way street, but the local currency showed it had some fight left and managed to pull back to end the week around 14.59 ... a nice pullback.

The Week Ahead (29 October - 2 November 2018)

As we enter the last week of October, the Rand started it on the front foot to hit 14.42 but has since lost some ground.

This week is likely to be an interesting one, with several high impact fundamental events that could provide some triggers for large moves.

Based on Friday's updated forecast, we have two possible scenarios playing out in terms of Elliott Wave patterns, with one being favoured over the other.

The movements over the past day suggesting this preferred wave count is likely playing out, BUT we still need some key levels to be triggered in order to confirm the market's trajectory for the next few weeks.

If you would like to see the present forecast for the next few days, weeks and months ahead, simply give our 14 Day Free Trial a shot.

Testimonials

"An improvement of about 18 cents on the dollar..."

"Thanks once again for the good service.

By using your forecast I was able to convert my US Dollars into Rands at the correct time and got top rate – an improvement of about 18 cents on the dollar. The last lot of money I brought in and I didn't use your forecast. It was stable around 11.30 for a few weeks so decide to bring it in. The day after it shot up to around 12. That wouldn't have happened if I had seen your forecast.

Thanks again"

Rob Wilmot
Cape Town, South Africa

"I saved at least R250,000... obviously one of the best investments of my life."

"You motivated me to transfer my foreign allowance instead of waiting for the rand to strengthen.

I am now very thankful that I did. I saved at least R250,000 by reading the rand exposé and looking at the ZAR/USD forecasts. It was obviously one of the best investments of my life.

Regards,"

Wynand Coetzer
Stellenbosch, South Africa

"If only I had listened to your prediction!!"

"I now see your point of how the markets can completely disregard fundamental events.

I would have thought the ZAR would strengthen ... but instead the market went in the opposite direction, costing me money for the time being.

If only I had listened to your prediction! It seems Elliot accounted for these bizarre movements without reason.

Wondering HOW the market works and WHERE it is going next?

Every week we send out an analysis on the previous week's movements, providing valuable information on WHY the market moved, WHAT caused the market to move, and WHEN and WHERE it is going it is going to move in the coming week! Join our Rand Reviews now via the form below